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Friday, February 10, 2017

Dull Budget at the Time of Crisis

Surajit Das

The government’s press release (dated 6th
January) on advance estimate of national income for the financial year 2016-17
tells us that the expected growth rate of GDP during the current financial year
is 7.1% and the estimated inflation rate is 4.8%. The growth estimate of first
two quarters of this year (i.e. from April to September, 2016) has been 7.2%.
Therefore, the expected growth rate - from last October till March 2017 - must
be 7% for achieving 7.1% growth for the entire year. It is good on the part of
government to be optimistic, however, it is dangerous if the government
underestimates the degree of ongoing depression following demonetisation. In
fact, the real growth rate in the second half of the current financial year
would be near zero, if not negative. The aggregate level of income and employment
in the economy is expected to come down (as compared to 2015-16) in the
post-demonetisation phase and has definitely not increased more than the last
two quarters of 2015-16. The IMF projections (of 6.5% growth in India etc.) are
equally hollow as our government projections. The annual growth rate of 2016-17
over 2015-16 cannot be more than 4% (if the growth rate happens to be near zero
in the last two quarters) under any circumstance. In the first two quarters of
2017-18, the growth rate would remain low in absence of a ‘big-push’ because of
higher base in the first two quarters of 2016-17. In the last two quarters, it
may show some signs of improvement due to lower base. Therefore, 11.75%
(nominal) growth assumption (made in the union budget of 2017-18) is clearly
impossible to materialise without a really big demand push.

The price of Kharif crop crashed. The agriculture and
allied sector has suffered a huge loss. The SMEs with small working capital and
with lot of casual labourers and daily wage earners in the informal sector have
been badly hit. The tourism sector has suffered a huge loss. The construction
and the real estate sector has already started showing a downward trend. The
story of the IT and BPO sector is also not very encouraging. The organised
manufacturing is stagnated for quite some time. From where will the 7% annual
growth come in the current as well as in the next financial year? Which sector
of the economy is expected to grow at such superfast rate to compensate the
losses of all other sectors? And also be high enough to ensure around 7% growth
of overall GDP?

According to the same press release of 6th
January, our government claims that the 7.1% growth rate of GDP would be
achieved by a negative growth (-0.2%) in private investment. How do the numbers
match? They were expecting 24% increase in government’s final consumption
expenditure (at constant prices), 6.5% increase in the private final
consumption expenditure in real terms and more than 4% reduction in import
bills. All of them are based on extremely unrealistic assumptions.

The negative import growth happened mainly because of
reduction in the international oil prices. International oil price fell by 26%
in the first quarter of 2016-17 as compared to the price in the first quarter
of 2015-16. In the second quarter, the oil price came down by 8%. However, in
the third quarter i.e. during October to December, the oil price has registered
an increase of 18% as compared to the price in this quarter of last year. And,
in the fourth quarter also, it is likely to rise because the international oil
price, which is on the rise again, was lowest during January and February,2016.
Therefore, one would expect the oil import bill to register a substantially
high increase in the last two quarters of 2016-17. The decline in overall
import bill was around 7.5% at constant prices during the first two quarters.
If it increases in the last two quarters and in the next year, the annual
import bill cannot come down by 4% as compared to last two quarters of the last
year.

The real private final consumption expenditure (PFCE)
has registered a growth of 7% in the first two quarters of 2016-17. If the
annual growth rate has to be 6.5%, the consumption expenditure in real terms
should rise at a rate of 6% in the previous quarter and in the current quarter.
After demonetisation even the government is claiming that the consumption
expenditure of people has been curtailed significantly. Then how would it grow
at 6%? Wouldn’t the growth rate of PFCE be negative in the last two quarters of
2016-17 as compared to the last two quarters of 2015-16?

As far as the government’s final consumption
expenditure (GFCE) is concerned, it was supposed to increase by 24% in real
terms in 2016-17. As far the growth rate of revenue expenditure of the central
government is concerned, it has grown by less than 13% in nominal terms and
with 4.8% inflation expectation, the revenue expenditure has increased only by
8% in 2016-17 (revised estimate) over 2015-16 (actuals). Clearly, it is absurd
to assume that the revenue expenditures of the state governments would increase
by more than 50% in nominal terms in the current financial year for ensuring
24% increase in the GFCE at constant prices. However unrealistic it may sound,
our growth numbers (7.1% etc.) are based on this level of absurdities.

The union budget for the financial year 2017-18 has
been placed in the parliament on 1st February in this context. The
honourable finance minister has acknowledged that the revenue of government in India as
proportion to national income is one of the lowest in the world. However, in
this year’s budget, surprisingly, the revenue-GDP ratio has been proposed to be
lowered from 9.44% (RE of 2016-17) to 9% (BE of 2017-18). Even if we assume
that the revenue would be relatively lower despite higher tax effort during
depression, the expenditure should have increased. In order to adhere to
self-imposed roadmap of so called ‘fiscal prudence’, the expenditure has been
lowered even more sharply from 13.4% (RE of 2016-17) to 12.7% (BE of 2017-18)
of GDP. The honourable FM has in fact said in his budget speech that when the
private investment is not growing, the public sector has to come in. However,
the capital expenditure of the government, including Rs.55000 crore capital
expenditure on railways, has actually come down from 1.86% (RE 2016-17) to
1.84% (BE of 2017-18) of GDP. How is the economy expected to recover from
crisis?

The ‘business as usual’ budget can still be defended
in normal times, but, under severe demand depression, this contractionary
fiscal stance would aggravate the misery of people. The MGNREGA cannot be a solution of aggregate
unemployment problem – at max, if implemented properly it can play the role of
a social safety net. For the sake of argument, even if all the young people
become ‘skill-full’ in the economy, it would not be able to ensure full
employment situation. The direction of fiscal policy in the present context in India is
clearly wrong in the sense that instead of undertaking an expansionary fiscal
policy (big demand push) under crisis, the budget has actually proposed further
contraction. Clearly, the government has failed to understand the gravity of
the situation and underestimated the degree of the ongoing crisis.

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